WTO issues landmark decision denouncing U.S. cotton subsidies

By Associated Press

SAO PAULO, Brazil -- In a decision that could have far-reaching repercussions for the American farmer, the World Trade Organization has ruled that U.S. cotton subsidies are unfair to farmers in developing nations.

Siding with a complaint from Brazil, the WTO said the subsidies boost U.S. production and exports while lowering world cotton prices.

The ruling is the first time a country has been challenged over its domestic agricultural subsidies, and the first case that looks at the effect of export subsidies on crops.

Monday's decision came in a long-awaited report by three WTO experts. A trade official in Washington, who declined to be named, said the United States plans to appeal.

"We believe U.S. farm programs were designed to be, and are, fully consistent with our WTO obligations," the official said. "We have serious concerns with aspects of the panel report."

If allowed to stand, the decision could bode ill for all U.S. farmers who benefit from government support. Curbing subsidies for cotton would mean support for other U.S. crops could be vulnerable to trade challenges.

It could also expose other industrialized nations to similar complaints.

Brazil, the world's fifth-largest cotton producer, says the United States has managed to keep its spot at the planet's second-largest producer only because the U.S. government paid $12.47 billion in subsidies to farmers between August 1999 and July 2003.

Details of the report were not made public but Clodoaldo Hugueney, a top economic official with Brazil's Foreign Ministry, said it showed that the 147-nation WTO agrees with some of Brazil's key arguments.

"We're satisfied with the conclusion," he told reporters in the capital of Brasilia.

Farm support payments have long been a source of contention in trade negotiations between wealthy and developing nations. The disagreement contributed to the collapse of world trade talks last year in Cancun, Mexico.

Neil Harl, an Iowa State University economist who sat on a panel appointed by Congress to examine limits on subsidies, said he had warned the commission last year that the United States likely would be forced to limit payments at some point.

The decision is particularly important for Brazil, which has led Latin American efforts calling for the elimination of U.S. crop subsidies that make it difficult for poor farmers in the hemisphere to compete with their richer American counterparts.

Cotton production in Brazil has doubled over the last decade as South America's largest country turned itself from a cotton importer into a cotton exporter.

Brazil first complained about U.S. cotton subsidies in September 2002, and the panel was set up in March 2003. Three trade law experts from Poland, Chile and Australia reviewed the case.

Brazil alleged cotton prices in the four-year period from 1999 to 1993 received by U.S. cotton producers were on average 77 percent below production costs. But U.S. production continued to rise.

The United States insists that its payments to farmers are within permitted levels, claiming many are not subsidies as defined by the WTO and should not be included in the calculations.

Many other countries are closely following the case to determine whether to bring their own challenges.

African cotton producers, for example, produce their crops much more cheaply than their competitors but complain that subsidies in the United States, the European Union and China hurt production and cause low prices because of a glut of subsidized cotton.

The case could also affect the current round of trade talks for a Free Trade Area of the America stretching from Alaska to Argentina.

Negotiations are bogged down in disagreement over agricultural goods and impact of subsidies on the international market in farm goods.

Associated Press writers Vivian Sequera in Brasilia and Emily Gersema in Washington contributed to this story